Investors expect the budget to focus on infrastructure, rural India and tax structures

Budget expectations and triggers for the markets will kick in this month, with the Union Budget presentation advanced to February 1 and the railway budget being merged with the main budget from this year.
Stocks linked to the infrastructure sector and rural India would be on investors radars this time, as most analysts feel the budget would have a distinct bias towards infrastructure and Bharat.
India Inc will also look for corporate tax reduction, as a road map is in place to bring down the rate to 25 per cent from 30 per cent. Foreign investors will be particularly concerned about the fine prints of the general anti avoidance rule (GAAR), to be implemented from the new fiscal year.
An expected increase in the income tax slab from Rs 2.5 lakh and higher tax breaks on investments under section 80 C of the Income Tax Act would aid urban consumption and would be a positive for consumption stocks.
The other domains the budget could focus on include tax reforms, raising agricultural output, social sector spending, infrastructure investments, accelerated usage of digital payment channels and promotion of financial inclusion.
Tax experts expect the holding period for capital gains tax relief on securities to be extended to three years, from one year now, which may sour market sentiments badly.
However, a section of experts also believes considering the ill-effects of demonetisation, the budget may stay away from negative measures that could worsen market sentiments.
Also, analysts do not expect any harsh measures on companies, given the political scenario, with seven states going to the polls this year.
Analysts at HDFC Securities expect fiscal boosters in the aftermath of demonetisation, a thrust on infrastructure and tax reforms to figure in the budget. The fiscal boosters could come in the form of higher spend on rural India– roads, irrigation, health care, sanitation and rural housing. Also, higher (full year) allocations will be made for one rank one pension (OROP) and the seventh pay commission. Lower personal income tax and incentives for housing spend can also be expected.

Allocations for roads, railways, urban infrastructure, mass/affordable housing, ports, airports could receive higher allocation. Defence procurement is also expected to rise, especially from Indian vendors, they said.
Riaz Thingna, director, Grant Thornton Advisory, said, since a four-year road map has been drawn for reducing corporate tax from 30 per cent to 25 per cent, it has to be seen to what extent the government will go on this. “Last year, a partial relief was provided to startups by reducing the corporate tax rates charged from them, and that could be now extended to all companies.”
In that case corporate tax rate could drop from 30 per cent to 28 per cent.
“On the capital gains tax side, budget could announce an extension of the period for availing of capital gains tax relief from one year to three years, which will be negative for the market,” Thingna said.
HDFC Securities, in its outlook the economy, said, “For the FY18 Union Budget, the key determinants will be a much larger tax base, fiscal push in the form of one-time transfers and higher infrastructure spending, impact of GST and, as large-scale disinvestment has become challenging, new revenue streams.”
This time, the budget will be presented in the backdrop of an improving fiscal position, with government financials looking up on reduced subsidy burden, comfortable forex reserves, stable currency and receding inflation.
Standard Chartered Bank, in a report titled, ‘India–Budgeting and Reforming Amid Uncertainty’ said, “the likely implementation of tax changes–both direct and indirect–in FY18 is expected to redefine the framework within which corporates (both domestic and foreign) operate and invest. For instance, the likely rollout of the long-awaited GST in FY18 (we expect it to be rolled out by 1 July 2017) will subsume more than 20 indirect taxes across five to six tax brackets, ease tax compliance, and widen the tax base over the medium term. Similarly, the implementation of corporate tax cuts and the phasing out of several exemptions (as announced in February 2015) should reduce the complexities of the tax framework for India Inc.
“While these tax changes are likely to be received positively, corporate India will probably remain cautious on the possible implementation of GAAR in FY18. The finance minister has indicated that the government will implement GAAR from 1 April 2017, with the primary objective of discouraging tax structures whose main purpose is to gain undue tax benefits. The move towards GAAR (along with other tax changes) is in line with tax adjustments being adopted globally. Any announcement on its implementation will be closely watched given that detailed GAAR guidelines have yet to be released, and there are concerns that the rule provides significant powers to tax authorities.”
Analysts are positive about the government sticking to the fiscal deficit commitment, though room exists for some deviation from the path.
Dipen Sheth, head-institutional research, HDFC Securities, said, “We do not think there is going to be a fiscal challenge; in fact some liberty on the FRBM (Fiscal Responsibility and Budget Management) target will be acceptable to most observers, internal or external, given the difficult situation in global growth.”
DBS Research, in a report titled ‘India Budget: Stability Over Growth’, said, "despite the negative impact on growth from the demonetisation, fiscal discipline will remain a priority. The government is likely to meet the fiscal deficit target of 3.5 per cent of GDP for FY17, as bunched-up revenues catch up with front-loaded expenditure in the second half of the fiscal year.”
Radhika Rao, analyst, DBS Research, said “We expect the government to retain the budget deficit target of 3 per cent of GDP set by the fiscal roadmap for FY17/18. Achieving this target will depend on whether nominal GDP growth for FY17/18 comes in stronger as expected,”
“The FRBM committee might propose a shift in the budget deficit target from a point to a range. If adopted, the deficit target may be revised to 3.0-3.3 per cent. In turn, this could provide flexibility for more public investments to offset the drag on growth from the recent demonetisation move,” Rao said.
As things stand, analysts expect the coming budget to be largely positive for the market but for any upsets on taxation.raviranjan@mydigitalfc.com